Wednesday, October 23, 2019

Georgia raises rate 3rd time in 2 months, lari rises

     Georgia's central bank raised its monetary policy rate for the third time in two months and reiterated that it would continue to tighten its policy until the pressure on the lari's exchange rate is eliminated and ease the upward pressure on inflation.
     The National Bank of Georgia (NBG) raised its rate by 100 basis points to 8.50 percent and has now raised it 200 basis points following earlier hikes on Sept. 4 and Sept. 25.
     The three rate hikes more than reverse two 25-basis point rate cuts in January and March, and the lari responded positively to the central bank's move, rising 0.2 percent to 2.960 per U.S. dollar. However, the lari still remains 9.5 percent below the start of this year.
     "The nominal effective exchange rate of the GEL remains at an impaired level and is pushing up inflation," the central bank said, adding further policy decisions will depend on how quickly inflationary pressures from the exchange rate will be eliminated.
     Georgia's inflation rate has accelerated in the last three months, rising to 6.4 percent in September from 4.9 percent in August, boosted by higher taxes on cigarettes and the lower lari.
     The central bank targets inflation of 3.0 percent and said demand is only partly offsetting the upward pressure on inflation from the fall in the lari as preliminary data indicate an acceleration in economic growth.
     Georgia's gross domestic product eased to annual growth of 4.5 percent in the second quarter from 4.9 percent in the first quarter and NBG said early data show the improvement in the current account balance had continued in the third quarter.
     In the second quarter Georgia's current account deficit narrowed to US$139.6 million from $232.3 in the first quarter and NBG said maintaining this positive trend, along with tighter monetary policy, will help strengthen the exchange rate and thus change the inflationary trend
     Last month the International Monetary Fund (IMF) welcomed Georgian authorities commitment to prudent macroeconomic policies and structural reform, including NBG's rate hike.
     The IMF also noted a significant adjustment in the current account in the first half of this year, with higher exports and remittances, along with falling imports,  helping narrow the deficit.
     The IMF maintained its forecast for Georgia's economy to growth 4.6 percent this year and inflation to ease to 5.4 percent by the end of the year and then converge toward the 3.0 percent target in 2020 as monetary conditions tighten.
     The current account deficit is projected by the IMF to narrow by almost 2 percentage points of GDP to 6.0 percent of GDP this year.


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